Phillips 66 (PSX) Issues Letter to Shareholders

Phillips 66 (NYSE: PSX) today sent a letter to shareholders highlighting the key issues on the ballot at its Annual Meeting on May 21.

The full text of the Independent Directors of the Board’s letter to shareholders follows:

Dear Fellow Shareholders,

As the Independent Directors of the Board of Phillips 66, it is our fiduciary duty to protect the rights of all shareholders and oversee the Company to drive long-term shareholder value.

As part of our focus on long-term value, we want to center your attention on three core issues that are most important to your vote at our May 21st Annual Meeting. These issues are:

1) The Quality of Our Nominees

At Phillips 66, we are committed to delivering long-term value through a focused strategy, disciplined execution and the right board leadership to guide our transformation. Our four nominees offer the right combination of deep industry expertise, fresh perspectives and strong independent oversight to lead the Company through its next phase. It's important to highlight that two of the Company's nominees are new and one was identified by Elliott just last year. The analysis from proxy advisors recommended Elliott’s nominees without considering the relative strengths of the Company's nominees. While proxy advisors have shared their opinions, the decision ultimately rests with you.

Those seeking real change should focus on the qualifications of the candidates – regardless of who nominated them. Our nominees bring the skills, experience, and judgment needed to tackle the Company’s most critical priorities and to deliver sustainable value for all shareholders.

• John Lowe has more than 30 years of experience in the energy sector and has consistently delivered tangible value in both executive and board roles at publicly traded energy companies.
• Robert Pease is a true independent director on the Board of Phillips 66. He was identified by Elliott. His extensive refining and commercial experience as the former CEO of Motiva Enterprises and Director of U.S. Operations at Cenovus Energy has made him an effective, vocal director. We fundamentally disagree with the suggestion that one vote on a governance practice that applies to 44% of S&P 500 companies1 should question his “independence.”
  • Shareholders should ask, what precedent will be set for new directors to exercise independence if a carefully evaluated director can be determined to somehow be “entrenched” only 22 days into their board service? It would pose a troubling message if independent directors appointed by an activist must strictly adhere to the activist’s agenda and not their own independent, professional judgment.
• We are pleased A. Nigel Hearne received support from Glass Lewis. Nigel has substantial international upstream and downstream operating experience and will provide valuable refining operations expertise to help Phillips 66 continue to improve refining operations.
• Elliott’s core thesis is to breakup Phillips 66, which involves significant execution complexities and considerations. There are few individuals with expertise in the hydrocarbon value chain who are better positioned to help evaluate this than Howard Ungerleider, who oversaw the financial and operational intricacies of one of the largest, most complex mergers and spin-off transactions in recent history as CFO of DowDuPont.

2) Our Commitment to Improve Refining Operations

Elliott has been critical of Phillips 66’s refining performance. However, much of the public analysis from Elliott and proxy advisory firms evaluate a five-year time horizon that, in part, predates the tenure of our CEO, Mark Lashier, who stepped into the role in 2022.

Since then, we’ve taken decisive steps to improve refining performance – investing in high return capital projects with estimated after-tax IRRs of 40% and thoughtfully rationalizing our refining portfolio. As a result, we’ve reduced our Refining Adjusted Controllable Costs2 from $6.98 per barrel in 2022 (before Mark stepped into the role) to $5.90 per barrel in 2024 – a 15% reduction.

Make no mistake – we are not satisfied with the status quo. We know that we have more work to do to improve our operational performance and profitability. That’s why we recently completed one of the largest Spring turnaround programs in the history of our company, safely, on-time and under budget. In the last three quarters, we set the three highest quarterly clean product yields in the history of the company, driven by multi-year investments in our portfolio, the long-term results of which are now coming to fruition.

With record yields and current utilization rates being significantly above the industry average, we are well positioned to capture more of the market in both Refining and Marketing and Specialties as we progress through the second quarter and into the busy summer driving months. We are also targeting a reduction in Refining Adjusted Controllable Costs from $5.90 per barrel to $5.50 per barrel by 20273, which will represent a 21% decrease from levels before Mark stepped into the role of CEO. The question shareholders should ask is: “Has refining performance improved and are there credible plans in place to continue along this journey?”

Analysts recognize our recent improvement, as well as the upside potential as we continue to high-grade our Refining portfolio:

“PSX remains a Large Cap refining top pick. PSX’s management team is focused on delivering growth at attractive returns, and further diversification and improvements to refining uptime might combine to restore PSX's premium positioning. We are Overweight rated.”

Wells Fargo (4/25/2025)

“As industry refining margins continue to normalize from peak-cycle 2022 over the next couple of years, we anticipate PSX higher non-refining earnings mix and growth to become a more appreciated factor.”

TD Cowen (4/27/2025)

“Management highlighted the completion of its large turnaround program, which should support improved refining earnings through the remainder of the year. We note the company remains focused on improving operational execution and yields across its refining footprint though accretive capital investments.”

Goldman Sachs (5/1/2025)

3) The Risks of Breaking up Phillips 66

Elliott has a thesis to break up the Company – plain and simple. Elliott has said this very clearly: “The Company’s midstream business, which we believe could command a valuation of more than $40 billion, should be sold or spun off. Its retail operations in Europe, along with its interest in CPChem, a joint venture with Chevron, should also be sold.”

Despite this breakup thesis, proxy advisor Institutional Shareholder Services (“ISS”) chose not to evaluate it in its report, noting: “It is important to establish that ISS is not opining on the merits of a potential midstream separation.”

The Board actively and rigorously evaluates the Company’s portfolio and strategic alternatives with the goal of maximizing long-term shareholder value – and takes decisive action when it aligns with that objective. We recently announced an agreement to divest a majority interest in the Jet retail marketing business in Germany and Austria, demonstrating our willingness to act when it makes strategic and financial sense. We committed to shareholders to deliver $3 billion of asset sales. We currently stand at over $5 billion since 2022 and we are not done, underlying our commitment to over delivering on our promises to shareholders.

Given that the proposed separation of our midstream business and sale of our interests in CPChem are the centerpiece of Elliott’s vision, this is a matter shareholders should evaluate carefully as they cast their votes. Elliott’s breakup plan should be at the forefront of that decision.

Pursuing a midstream separation and a sale of our interests in CPChem at this time would expose shareholders to unnecessary risk in pursuit of uncertain and speculative valuations. Elliott’s analysis ignores large tax leakages, the loss of integration synergies and the importance of critical market cycle timing. Moreover, it jeopardizes the consistent and growing dividend that we have delivered to shareholders across commodity cycles. The Board has thoroughly evaluated the breakup scenario and has reached three conclusions:

1. Elliott’s analysis of a midstream spin or sale is overly simplistic and underpinned by speculative valuations. It ignores or significantly underestimates tax leakage, dis-synergies, buying power of potential buyers and other factors that are extremely important to consider in a sale or spin.
2. Current chemicals sector valuations make any monetization of CPChem unattractive and likely value-destructive for shareholders. Elliott’s implied valuation of CPChem rose by 50% to $15 billion since its initial presentation to the Company in November 2023, despite Chemical peers trading down 19%4 during the same time frame.
3. Breaking up our integrated business model would put our continued delivery of a consistent and growing dividend at risk. A RemainCo without midstream or chemicals would have greater exposure to commodity price swings and market volatility – risks our current integrated model insulates us from today.

Based on our analysis, breaking up the business at this time would introduce undue risks to our shareholders in pursuit of illusory valuations. Those who analyzed the merits of a breakup have recognized the riskiness and flaws in Elliott’s proposal5:

“PSX Midstream is not Speedway […] It is not at all clear whether, even if PSX did sell or spin off its Midstream business, its buyback path would be similar to that of MPC.”

Barclays (2/11/2025)​

“PSX's Gulf Coast Refining, Midstream and Chemicals ops range from somewhat to deeply integrated which could complicate any breakup of the company.”

Wells Fargo (2/11/2025)

“We believe selling CPChem ahead of two large projects coming online and close to the bottom of the margin cycle may not be the right idea.”

Citi (2/13/2025)

“[A] 10x multiple on a ~$4B EBITDA figure would make a very sizeable entity that would be difficult to acquire, at best.”​

J.P. Morgan (2/11/2025)​

To be clear: this is our current view, based on extensive analysis and prevailing market conditions. The Board remains committed to evaluating all value-maximizing opportunities as circumstances evolve.

Your Vote Matters

Phillips 66’s Board of Directors urges shareholders to use only the WHITE proxy card to vote:

• “FOR” all four of the candidates proposed by the Company and not Elliott’s four nominees;
• “FOR” management’s proposal to approve the declassification of the Board of Directors; and
• “AGAINST” Elliott’s proposal to adopt a policy requiring annual director resignations, which would violate Delaware law if implemented and expose your Board to significant legal and reputational risk

Thank you for your continued support of Phillips 66.

Sincerely,

The Independent Directors of the Phillips 66 Board of Directors

About Phillips 66

Phillips 66 (NYSE: PSX) is a leading integrated downstream energy provider that manufactures, transports and markets products that drive the global economy. The company’s portfolio includes Midstream, Chemicals, Refining, Marketing and Specialties, and Renewable Fuels businesses. Headquartered in Houston, Phillips 66 has employees around the globe who are committed to safely and reliably providing energy and improving lives while pursuing a lower-carbon future. For more information, visit phillips66.com or follow @Phillips66Co on LinkedIn.

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